Before you dismiss my premise and label me as one who is out
of step with the highly publicized social media mega deals, I am excluding them
from my population. I am excluding them because they have a very important
characteristic of value and that is broad customer acceptance. That acceptance
was generally accomplished virally and very inexpensively. The owner of that technology
will, the wisdom goes, eventually figure out a way to monetize all of those valuable
users.
For purposes of this article I am limiting my population to
technology based products and businesses that are aimed at the B2B marketplace.
A good example might be application software. I may need a little help from
Charles Darwin here with his theory of natural selection or may borrow from the
saying that there are old pilots and there are bold pilots but very few old
bold pilots.
Technology companies that buy other companies or
professional investors that buy technology based companies generally have a
first gate that all acquisitions have to pass in order to be considered as an
acquisition candidate. Those targets must have real paying customers producing
revenues, not necessarily profits, but that also is an often used helpful gate.
Another gate is the level of revenues. We have small
software companies approach us and say that Microsoft or Google or Apple should
buy them. They have $5 million in revenue. Unless they are in the massive user
base category or have a quantum leap technology, there is no chance. The
corporate development people in those organizations are under instructions to
only consider move the needle opportunities. It takes as much resource to
complete a $300 million acquisition as it does a $5 million acquisition. Where
do you think these giants are focusing their resources?
In working with entrepreneurs we see several recurring
themes. They are wonderfully optimistic. With the odds of succeeding in a start-up business not in their favor
they must employ emotional blinders in order to press on. They believe their product
compares very favorably on a feature/functionality basis with the leading
competitive solutions on the market. Their estimate of both the TAM (total
addressable market) and their eventual share of that market are highly aggressive.
They under estimate the difficulty of reaching a critical mass of paying
customers. And most importantly, they believe in their mission and deliver
their message with the passion and commitment of a Billy Graham sermon.
We know from first-hand experience having represented
several of these promising companies over the years. With this arsenal of
optimism, these entrepreneurs have been pitching the corporate development
departments, angel investors, venture capital funds, individual investors,
friends and family, etc. You know what the buyers and investors all found out (even the super stars
from Silicon Valley fail on 8 out of 10) was that they were not particularly
good at picking the winners pre-revenue or pre- critical mass revenue.
Getting back to my Charles Darwin reference, the survivors
evolved. They developed a characteristic that has enabled them to prosper. They
no longer try to predict the winners pre-revenue. They let the market do it for
them. No guru, no survey, no analytics is ever going to match the predictive
power of the wisdom of crowds casting their economic vote to identify the
winner.
The second gate, the size of revenue also performs a very
important function especially when it comes to information technology or
emerging technology. A large company will often expend as much internal
resource in integrating a new product into their organization and rolling it
out to their sales channel as they originally spent for the company
acquisition. Given that backdrop, they want to eliminate or reduce as much as
possible, the technology risk. In other words, does the stuff work and will it
stand up to the rigors of thousands of users. A product that has achieved a
critical mass of users has been subjected to the quality control of paying and
renewing customers with other choices. The major bugs have been worked out and
the product has gone through a continual feedback loop of improvement.
The company buyers/investors survivors recognized that it
was too difficult to predict the winners pre-revenue, even with the smartest
guys in the room, without a natural market vetting process. The economic vote
of a critical mass of customers has proven to be the best of all predictors of
success. When a technology entrepreneur hits this gate with his targeted buyer
and gets quickly dismissed, it doesn't mean that he has a bad product, it means
that he has one more step to take before the money starts to flow. Focus your resources on generating sales.
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